Reply to What a self made multiple millionaire would do in your shoes to increase your net worth.

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[quote=Anonymous][quote=Anonymous][quote=Anonymous]I am having a hard time figuring out how to model the below in excel. Can you help me understand better by reviewing my calculation and tell me if I am expressing it correctly? The one issue with my calculation is I am not sure where I can purchase a home for this price that rents for $2750, but let's suspend that part of reality for a moment so I can get the spreadsheet set up!

[quote]
You need to pick a rate of return that is acceptable for you in rental real estate.  When I first started that figure for me was 8% cash on cash return, net of all expenses, preferably with a fixed mortgage.  The following is the rough formula I use to assess a property.  Take the gross monthly expected rent and multiply time 85%.  This affords me 5% for repairs, 5% for management fee and 5% for vacancy factor.  You have to make 8% cash on cash return on 85% of the gross income after PITI (principal, interest, taxes and insurance).  When I first started I always did my own management (and did until I had about a dozen properties).  As a result of managing them myself my true vacancy rate was less than 1%.  But, still you shouldn't buy something unless it works at 85% (if you have a property manager that charges more than 5%, you need to lower the 85% number accordingly). [/quote]

Property Purchase Price: $400,000
Downpayment Required by Lender: $100,000 (25% b/c Investment Property right?)

Gross Monthly Rent: $2750
Less PI: $1520.06 (300k at 4.5%, 30 year fixed)
Less Ins: $62.50 monthly
Less Taxes: $375 monthly
Remaining: $792.44 monthly, $9,509.33
85% of remaining: $8,082.93 annually, which is approximately 8% of downpayment amount ($100,000)
[/quote]

OP here.  Almost $2750 times 85% equals $2337.  Leaves profit of $379 per month.  Times 12 months is $4548.  Divided by $100K is 4.548% cash on cash ROR.  Incidentally you can get investor loans at most banks at 20% down.  And you can do much better than 4.5% today.  To quickly ballpark properties any time you can get 1% of the purchase price in rent, you almost always have a winner.  1/2% is always a loser.[/quote]

Most banks require 25% down on investment loans, and getting 1% on the purchase price in the DC area is a fantasy...unless you're talking about slum/ghetto areas..
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